Ending retroactive tax is goal of joint effort backed by BOE Chair Horton

March 05, 2013
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Bipartisan effort launched to fix ‘retroactive’ tax
SACRAMENTO – In an effort to provide relief to California taxpayers stunned with the imposition of a retroactive tax, Sen. Ted W. Lieu, Asm. Jeff Gorell and Board of Equalization Chair Jerome E. Horton today announced a joint effort to craft a bipartisan, comprehensive solution to the problem created by the recent California Court of Appeal decision in Frank Cutler v. Franchise Tax Board.

“Our goal is to fix this problem,” Lieu, D-Torrance, said in support of a real solution. “Since it can’t be done administratively, we’ll fix it legislatively.  Californians planned and based their actions on the language of the law as it existed. Going backward in time and changing the rules innocent taxpayers relied upon violates the very essence of the rule of law.”

Horton, a former lawmaker and BOE representative on FTB, said a solution was needed to help California’s economy and provide reliability for taxpayers. 

“California businesses should be able to rely on the Legislature to get it right or amend the law to make it right,” Horton said.  “This legislation addresses the constitutional concerns in the Cutler decision, and relieves taxpayers of the penalty."

Principally, Senate Bill 209 will be amended to bring relief to thousands of taxpayers who were recently notified that the FTB would retroactively assess those who claimed California’s Qualified Small Business Stock (QSBS) tax benefits.  In addition, Assembly Bill 1203 was introduced to establish a prohibition against state agencies from seeking penalties and interest when applying retroactive tax increases as a result of a court ruling like that in this case.

“Retroactive tax increases for those small businesses that complied with the law and played by the rules is simply unfair and builds upon the perception that the state is hostile to business,” Asm. Gorell, R-Camarillo, said. “We want to unwind this poor decision and bring relief to small business owners throughout the state, while also setting prohibitions against this kind of surprise tax increase again for the future.”

The issue stems from a decision by the California Court of Appeal, in the Cutler v. Franchise Tax Board case, wherein the Court ruled that the California QSBS deferral and exclusion was unconstitutional and the Franchise Tax Board administratively implement the Court’s decision.  The QSBS tax credit law, passed in 1993, was intended to spur investment in California startups and small businesses.  The incentive allowed for the exclusion of 50 percent of capital gains earned from investments in businesses valued at less than $50 million adn which had at least 80 percent of their payroll in California at the time the stock was acquired.

Faced with a court ruling that found several aspects of the tax  provisions to be in violation of the U.S. Constitution’s Commerce Clause, and constrained by the original enacting Legislature’s intent to only provide the QSBS tax credit to investors in businesses that maintained at least 80 percent of their assets and payroll within California, the Tax Board’s only option  was to enforce the Court of Appeal’s decision, which ended the 20-year-old capital gains tax break. This resulted in the retroactive taxation of thousands of investors for tax liabilities, plus interest and penalties, going back to 2008.

As a result, entrepreneurs throughout the state are now facing exceptionally large tax bills – as high as tens of thousands to hundreds of thousands each.  It is estimated that California will recoup as much as $120 million in back taxes.

“We want to hear from the public and make sure we get it right,” Lieu said.  “Collaborating with interested parties including lawmakers, affected taxpayers and the tax-practitioner community will help ensure this new law is meaningful and has a favorable impact.”

For more, including a letter Lieu wrote to the FTB last January, visit Lieu’s Web site at the address below.

Ted W. Lieu represents nearly 1 million residents of Senate District 28, which includes the cities of Carson, El Segundo, Hermosa Beach, Lomita, Manhattan Beach, Redondo Beach and Torrance, as well as portions of Long Beach, Los Angeles and San Pedro. With redistricting, Lieu will also be responsible for constituents in Santa Monica, Beverly Hills, Pacific Palisades, Palos Verdes Peninsula, West Hollywood, West Los Angeles, and portions of Hollywood. For more, visit www.senate.ca.gov/lieu.

CONTACT: Ray Sotero
Communications Director
Sen. Ted W. Lieu, Senate District 28
Capitol Building, Room 4061
Sacramento, Calif. 95814
(916) 651-4028 office; (916) 834-1128 cell